The Securities Hunt: Collecting Dust or Dividends?

On A&E’s blockbuster television series “Storage Wars,” teams of bidders vie to score big at West Coast auctions for goods squirreled away at abandoned or confiscated storage units. So what if the grist of the reality show – unexpected, valuable finds such as collectible sports memorabilia, antiques or rare coins ― included stacks of stock certificates or dividend checks?

What are the federal requirements for securities that are separated from its owner? Or for payments on securities when the owner can’t be located? Is the finder really the keeper?

The U.S. Securities and Exchange Commission is addressing the overall ownership issue at the behest of Congress, and is currently reviewing public comments filed on the proposed rulemaking. Financial agents responsible for moving securities among owners are weighing in with suggested changes to the SEC direction.

The Securities Transfer Association, Inc. has asked the SEC to modify the proposed federal rulemaking provisions that govern “missing security holders.” The SEC estimates there are approximately 3 million of these missing security holders who are entitled to unclaimed securities worth as much as $10 billion. That’s a lot of unclaimed money!

nother $500 million in stock dividends are not cashed each year. Needless to say, the problem is huge and just who will be reaping those rewards is what is at stake.
STA thinks the phrase “missing security holders” is misleading and could be construed to mean the stock owner is somehow lost and that the next phone call you make should be to report a missing person. So, the group prefers the term “unresponsive payee” to differentiate between those who don’t respond to mailings or don’t cash a security-related check (such as a dividend), and those “lost security holders” who truly can’t be located.

The association supports the SEC’s broad goal of reducing the number of security holders who cannot be located by their broker dealers, so that a security holder’s dividends, interest or underlying securities don’t become abandoned property. Unclaimed property can eventually be taken by the states under their “escheat” laws. In short, don’t get too excited if you find 500 shares of Apple stock certificates in that storage unit and the owner is missing in action.

Escheatment is the transfer, or re-assigning, of the legal title of abandoned property to the state. “Abandoned” is considered property whose owner cannot be located or determined. Each state has a different process of escheatment with up to 5 years as the benchmark for inactivity or lack or contact with an owner. Like a good game of hide-and-seek, they require a good faith effort to reach or locate an owner. At the conclusion of the “inactive” period specified, the state takes ownership after making one last attempt to locate an owner themselves. The sold securities then become part of the state funds. While most states could use that money these days, it is, after all, someone’s missing property. So, it doesn’t necessarily end there.

Should a former owner make a valid request to the state and can prove ownership of the property, the state will normally settle, in cash, equaling the value at the time of escheatment. So if the value of the security jumped 40%, for whatever reason, from then until the owner actually contacted the state, that owner is tough out of luck. Rules regarding this process will vary by state but don’t expect to reap any profits that might have occurred while the state was in possession of the security. The state will keep that profit for their troubles. The refund is then made to the owner for no cost or a nominal fee at most.

Some states make a more “egregious money grab” than others in these budget-stretched times, says Thomas L. Montrone, the chairman, president and CEO of Registrar and Transfer Co. in Cranford, N.J. From his vantage point as a transfer expert and STA vice president, he sees a consumer benefit under the proposed SEC rule.

Because it requires transfer agents to inform stockholders they have un-cashed checks, he predicts “fewer investors will have their aged dividends simply given to the state.” Ditto for brokers. They would have to make the same attempt as transfer agents have over the years to find truly “lost” investors and let them know an old check is outstanding. Now who wouldn’t like to get that phone call?

Valuable, abandoned and lost assets are what that competitive cadre of Storage Wars bidders vie for when they expectantly elbow their way to prime positions as the metal doors to storage units are unlocked and thrown open. While a stash of un-cashed dividend checks or stock certificates might momentarily pump these characters’ televised adrenaline, if the absent securities owners had been notified and replaced those forgotten assets, it might feel like an episode of Hoarders. As in, yes, this was just a pile of useless junk.

What does this mean for you? State governments can take unclaimed or abandoned property under authority provided by states’ escheat statutes. These powers vary by state and extend not only to tangible property but to financial assets. The U.S. Securities & Exchange Commission is looking to protect individual investors by formulating new rules governing efforts that must be made to contact and notify owners of apparently abandoned securities. But ultimately, it is the responsibility of the owner of the security, or other financial property, to be a good custodian of those assets to avoid this issue altogether. After all, $10 billion in unclaimed securities would then be in the hands of some very happy investors and not the states.